Sample-Introduction To Commercial Law

ATD LEVEL 1
DCM LEVEL 1
INTRODUCTION TO COMMERCIAL LAW
STUDY TEXT
GENERAL OBJECTIVES
This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable
him/her to apply the principles and provisions of commercial law in various business
environments
LEARNING OUTCOMES
A candidate who passes this paper should be able to:
 Apply general principles Of commercial law in business
 Identify the various dispute resolution mechanisms
 Demonstrate knowledge of legal personality
 Describe the different types of property
 Apply the law of contract in various scenarios
CONTENT
1. Introduction to Law
Nature, purpose and classification of law
- Meaning, nature and purpose of law
- Classification of law
- Law and morality
Sources of law
- The Constitution
- Legislation
- Substance of common law and doctrines of equity
- African customary law
- Islamic law
- Judicial precedent
- General rules of international law and ratified treaties
Administrative law
- Meaning
- Doctrine of separation of powers
- Natural justice
- Judicial control of the Executive
The court system

- Structure, composition and jurisdiction of courts
- Magistrate courts
- Courts martial
- Kadhis courts
- Environment and Land Court
- Industrial Court
- Court of Appeal
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- Supreme Court
Law of persons
- Types of persons: natural person, artificial person
- Nationality, citizenship and domicile
- Unincorporated associations
- Corporations
- Co-operative societies
2. Law of tort
- Nature of tort
- Vicarious liability
- Strict Liability
- Negligence
- Nuisance
- Trespass
- Defamation
- Occupiers liability
- General defences in the law of tort
- Limitation of actions
3. Law of contract
- Definition and nature of a contract
- Classification of contracts
- Formation of a contract
- Terms of a contract
- Vitiating factors
- Illegal contracts
- Discharge of contract
- Remedies for breach of a contract
- Limitation of actions
2.4. Sale of goods

- Nature of the contract
- Formation of the contract
- Terms of the contract
- Transfer of property and title in goods
- Rights and duties of the parties
- Auction sales
- International contracts of sale: FAS, FOB, CIF, FCA, CPT, CIP, DAT, DAP, DDP, CFR,
DAF, DES, DDU, Ex-works and Ex-ship
5. General principles of consumer credit

- Nature of the hire purchase contract
- Difference between hire purchase and conditional sale/credit sale
- Formation of the hire purchase contract

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- Terms of the hire purchase contract
- Termination and completion of the hire purchase contract
6. Indemnity and Guarantees

- Nature of the contracts
- Advantages and disadvantages of guarantee as security
- Termination of contract of guarantee
7. Partnership
- Nature of partnership
- Relations of partners to persons dealing with them
- Relations of partners to one another
- Rights, duties and liabilities to existing, incoming, outgoing and minor partners
- Dissolution of partnership and its consequences
8. Insurance
- Nature of the contract
- Formation of the contract
- Principles of insurance
- Types of insurance
9. Agency
- Meaning, nature and creation of agency
- Types of agents
- Authority of an agent
- Termination of agency
10. Negotiable instruments

- Nature and characteristics
- Negotiability and transferability
- Types: cheques, promissory notes, bills of exchange
- Rights and obligations of the parties
11. The law of property

- Definition of property
- Classification of property (real and personal, movable and immovable, tangible
- and intangible)
- Property in land: Private, Public and Community land
- interests in land: estates, servitudes and encumbrances
- Intellectual property: plant breeder’s patents, trademarks, copyrights and
- industrial designs

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12. Resolving commercial disputes
- -Nature and problems associated with commercial litigation
- Arbitration
- Mediation
- Negotiation
13. Emerging issues and trends
CONTENT PAGE
Topic 1: Introduction to Law

Nature, purpose and classification of law…………………………………...6
Sources of law………………………………………………………………18
Administrative law……………………………………………………….…38
The court system……………………………………………………….……58
Law of persons………………………………………………………………69
Topic 2: Law of tort………………………………………………………………………….....80
Topic 3: Law of contract……………………………………………………………………....128
Topic 4: Sale of goods………………………………………………………………………....162
Topic 5: General principles of consumer credit………………………………………….…....179
Topic 1: Indemnity and Guarantees………………………………………………………..….186
Topic 6: Partnership……………………………………………………………………………195
Topic 7: Insurance……………………………………………………………………………..204
Topic 8: Agency………………………………………………………………………………..212
Topic 9: Negotiable instruments……………………………………………………………….225
Topic 10: The law of property………………………………………………………………….238
Topic 11: Resolving commercial disputes……………………………………………………..259
Topic 12: Emerging issues and trends

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CHAPTER 1
NATURE PURPOSE AND CLASSIFICATION OF LAW
Introduction
By the end of this topic the learner should be in a position to answer the following questions
from general detailed perspective.
 What do you understand by the term law?

 What are the distinct features of law that make it what it is?
 Explain using relevant examples, the various ways in which law in your country is
classified?
 Explain the relation that exist between law, morality and ethics, citing various examples
where need be?
 Explain the purpose of law in your country
While “the law” may appear to be abstract or far fetched from your daily activities, it is in reality
within the framework of what you do. Think of returning something you just bought, filling tax
returns, wondering what to do with the annoying neighbor who insists on holding loud gathering
in his/her house or who keeps insisting on hanging stuff on your fence. Well mostly these
activities require some level of legal know how.
This book aims at answering how to handle most of these scenarios and such equivalent in legal
sense. What is law, where does it come from, what makes it binding, all these and more.
MEANING OF LAW
Law, simply put, refers to the set of rules which guide our conduct in the society and is
enforceable by the state via public agencies.
Law in its general sense tends to be as a result of the necessary relations arising from the nature
of things. In this sense all things have their laws. Humans, material world, superior beings and
even animals all have their own laws. Simply put, the nature of these relationships tends to
determine the nature of the laws.
But the intelligent world is far from being so well governed as the physical. This is because
intelligent beings are of a finite nature, and consequently liable to error; and on the other, their
nature requires them to be free agents. Hence they do not steadily conform to their primitive
laws.
Law in general is human reason, inasmuch as it governs all the inhabitants of the earth: the
political and civil laws of each nation ought to be only the particular cases in which human
reason is applied.

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According to the oxford dictionaries law can be defined as; The system of rules which a
particular country or community recognizes as regulating the actions of its members and which it
may enforce by the imposition of penalties
NATURE OF LAW
The different schools of thought that have arisen are all endeavors of jurisprudence: Natural
law school Positivism, realism among others. It is these schools of thoughts that have
steered debates in parliaments, courts of law and others.
 Natural law theory asserts that there are laws that are immanent in nature, to which
enacted laws should correspond as closely as possible. This view is frequently
summarized by the maxim: an unjust law is not a true law, in which 'unjust' is defined as
contrary to natural law.
 Legal positivism is the view that the law is defined by the social rules or practices that
identify certain norms as laws
 Legal realism- it holds that the law should be understood as being determined by the
actual practices of courts, law offices, and police stations, rather than as the rules and
doctrines set forth in statutes or learned treatises. It had some affinities with the sociology
of law.
 Legal interpretivism- is the view that law is not entirely based on social facts, but
includes the morally best justification for the institutional facts and practices that we
intuitively regard as legal.
Generally speaking law has the following characteristics
1. It is a set of rules.
2. It regulates the human conduct
3. It is created and maintained by the state.
4. It has certain amount of stability, fixity and uniformity.
5. It is backed by coercive authority.
6. Its violation leads to punishment.
7. It is the expression of the will of the people and is generally written down to give it
definiteness.
8. It is related to the concept of 'sovereignty' which is the most important element of state.

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SOURCES OF LAW
The various sources of law of Kenya are identified by:
1. Judicature Act
2. Constitution
3. Hindu Marriage and Divorce Act
4. Hindu Succession Act
5. Kadhis Court Act.
Sources identified by the Judicature Act
1. The Constitution
2. Legislation (Act of Parliament) (Statutes)
3. Delegated legislation
4. Statutes of General Application
5. Common law
6. Equity
7. Case law or (judge–made law)
8. Africa Customary law
Sources identified by the Constitution and the Kadhis Court Act
Islamic law
Sources identified by the Hindu Marriage and Divorce Act1 and The Succession Act2
Hindu law
Sources of law of Kenya may be classified as:
1) Written and unwritten sources

2) Principal and subsidiary sources
THE CONSTITUTION
This is a body of the basic rules and principles by which a society has resolved to govern itself or
regulate its affairs. It contains the agreed contents of the political system.
It sets out the basic structure of government. A Constitution may be written or unwritten.

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Constitutions may be classified in various ways:
1. Written and Unwritten

2. Republican and Monarchical
3. Presidential and Parliamentary
4. Rigid and Flexible
The Kenyan Constitution is written. It was enacted by the English parliament in 1963 for
purposes of granting Kenya independence. It has been amended many times.
Section 3 (1) (a) of the Judicature Act recognizes the Constitution as a source of law of Kenya. It
is the fundamental law of the land and prevails over all other laws. It is the supreme law.
Supremacy of the constitution
The supremacy of the Constitution as source of law is manifested in various ways:
1. All other laws derive their validity from the Constitution

2. It proclaims its supremacy. Section 3 of the Constitution provides inter alia (among other
things) “The Constitution is the Constitution of the Republic of Kenya and shall take the
force of law throughout Kenya, if any other law is inconsistent with this Constitution, this
Constitution will prevail and the other law shall to the extent of its inconsistency be void”
The phrase “any other law” used in Section 3 of the Constitution was interpreted in
Okunda and Another v. R (1970) to mean any other law be it international or national.
In this case, the High Court was called upon to determine which law was superior
between the Constitution of Kenya and the Official Secrets Act of the East African
Community. The court was of the view that Section 3 places beyond doubt the pre
eminent character of the Constitution.
3. Organs of government: The Constitution creates the principal and other organs of
government. The Legislature, Executive and the Judiciary owe their existence to the
Constitution. Additionally the Constitution creates other bodies and offices e.g.
 The Electoral Commission (ECK was disbanded and replaced by the Interim
Independent Electoral Commission of Kenya after the 2007 general election


 Offices of the AG, Auditor General and the Commissioner of Police are created
4. Amendment procedures: The Constitution has a special amendment procedure. Under

Section 47 (1) of the Constitution, parliament is empowered to alter the Constitution.

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ADMINISTRATIVE LAW
Meaning
Administrative Law can be defined as the law relating to public administration. It is the law
relating to the performance, management and execution of public affairs and duties.
Administrative law is concerned with the way in which the Government carries out its functions.
Administration is the act or process of administering, which simply means it is the act of meting
out, dispensing, managing, supervising and executing government functions
It is the law relating to control of governmental power. It can also be said to be the body of
general principles, which govern the exercise of powers and duties by public authorities.
The primary purpose of administrative law, therefore, is to keep the powers of government
within their legal bounds, so as to protect the citizen against their abuse.
Administrative law is also concerned with the administration and dispensation of delivery of
public services. However it does not include policy making.
Administrative law is concerned with how the government carries out its tasks.
The government tasks include delivery of public services such as health, security, facilitating
trade, arbitration of disputes, and collection of revenue.
Administrative law is the law relating to the executive branch of government. The law deals with
a variety of things e.g.
i. The establishment of public authorities e.g. the city council, establishment of public
bodies and organs.
ii. The nature of the tasks given to various public organs and public agencies.
iii. The legal relationship between the public bodies themselves and also between the public
agencies and the public and between public agencies and the citizens.
Administrative Law is concerned with the means by which the powers and duties of the various
public agencies, public bodies and public institutes can be controlled.
Administrative functions can be divided into a number of broad categories namely
1. Ministerial functions; Examples of Ministerial Functions are those functions carried out
or performed by Government Ministers in their implementation of governmental policies
and programs. Examples include appointment of public officials by Ministers and the
grant of ministerial approvals and consents.

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2. Administrative functions: these are the functions carried out by public officials and
public bodies in their management of various governmental bodies in their provision of
services for example educational services and in their administration of various social
services as in the case of social security services.
3. Legislative functions: These include the function of making or creating subsidiary

legislation. The responsibility of legislative functions is on the respective Ministers‟. The
duty of making by-laws is also the respective ministers.
4. Judicial functions: These primarily involve the functions of determining claims or

disputes between individuals and other bodies. A good example of administrative body
that performs judicial functions is the Industrial Court which functions as a court of law.
5. Quasi Judicial functions: These involve the exercise of powers which are fundamentally
judicial but without the usual trappings of a court of law for example without strict
requirement of rules of evidence or the observance of rules of evidence, without strict
requirements of examination of witnesses and without other legal Technicalities. A good
example being the Liquor Licensing Court, the Land Control Boards and the Motor
Vehicle Licensing Authorities.
Functions/purposes of administrative law

1. It ensures proper dispensation of services.
2. It seeks to protect citizens from abuse of power.
3. To keep the powers of government i.e powers of various public bodies within their legal
bounds, so as to protect citizens from their abuse. Abuse of power can arise either from
malice, bad faith or even from the complexities of the law.
4. There are duties placed in public bodies (public institutions) such that another function of
the law is to see that the duties are performed and that the public agencies can be
compelled to perform their duties where there is laxity or where they refuse or otherwise
fail to do so.
DOCTRINE OF SEPARATION OF POWERS
Doctrine of separation of powers is a legal framework developed by a French jurist named

Montesquieu whose concern to contain the over-concentration of governmental powers in the
hands of one person or a body.
This doctrine is a characteristic of Constitutionalism which is the theory of limited government.

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THE COURT SYSTEMS
THE STRUCTURE
The Courts operate two levels: Superior Courts and Subordinate Courts. The important aspects
in the Structure of Courts are:
i. The structure – The hierarchy or levels of Courts.

ii. Establishment – The composition or who presides in that Court.
iii. Jurisdiction – The powers of different Courts to hear and determine disputes.
Jurisdictions are either Geographical / territorial limits of their powers or Functional powers (to
hear Original matter, Appellate matter or both matters or subject matter (whether it is civil or
criminal justice) or Pecuniary (the range of monetary or financial value of subject matter).
The figure illustrates the structure and explains the hierarch of the Courts as it is today in Kenya.

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The arrow on the figure shows the hierarchy of courts in Kenya. There are two levels of courts
Superior Court (consist of Supreme Court, Court of Appeal and High Court) and Subordinate
Courts ( Resident Magistrate Court, Kadhi Courts, Court Martials, Tribunals, District Magistrate
Courts Classes 1st, 2nd and 3rd.) The arrows show flow of appeal from one level to the next.
The arrows represent flow of appeals in both civil and criminal appeals except criminal appeals

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LAW OF PERSONS
Introduction
A person is defined is defined as an entity or being which is recognized by law as having certain
defined rights and obligations. Such an entity or being hs said to be a legal person. Legal persons
are divided into two namely;
a) Artificial persons
b) Natural persons
An entity which` is recognized as a person is said to have a legal personality. i.e. it has attributes
which are recognized by law as constituting a person. Examples include human beings (natural
persons) and corporations (artificial persons) .These have legal personality to the extent that they
each have their own rights and obligations recognized by law
ARTIFICIAL PERSONS
Artificial persons may be corporations or unincorporated associations.
a) Corporations
A corporation may be defined as an association of persons binded together for sole particular
object, usually carry on business with a few of profit. If other words a corporation is an artificial
person created with by law with capital divided into transferable shares and with limited or
unlimited liability possessing a common seal and perpetual succession. The corporation has,
therefore, ` legal personality of its own distinct from that of its members. The individual
members have rights and liabilities of their own apart from those of the corporation. The
corporate body is different in that it has perpetual succession, it never dies and has a common
seal by which to authenticate its acts. The members may change, but the corporate body does
not.
Types of Corporation
There are basically two types of corporation: corporation sole and corporation aggregate. The
two differ both in the manner of their creation as well as their membership and also in their
operation
i. Corporation sole
Corporation sole is one which consists of one human member at a time, such member being the
holder of an office which is held in succession by one person at a time. Some corporations’ sole
are creatures of the common law, e.g. the office of a bishop. There cannot be more than one
bishop in a `diocese at the same time and when a particular bishop dies as an individual, his
office never dies and continues in existence with another bishop as a successor. Other

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corporation sole are created by constitution or any Act of Parliament e.g. the Office of the
President or the Office of the Pubic Trustee.
ii. Corporation Aggregate

Most corporations are corporations aggregate. These consist of two or more members at the same
tire. Basically, there are two types of corporation aggregate operating in Kenya. These are
statutory corporations and registered companies.
Creation of Corporations
A corporation can be created in the following to ways:
(a) By act of parliament

The corporations can be created by the Act of Parliament in Kenya. The state corporations are%
created by this method. The main examples of such corporations are: Kenya railways, Kenya
airways, Kenya Meat Commission, Pyrethrum Board of Kenya, Coffee Board of Kenya e.g.
Such corporations owe their legal existence to a statue. A statue creating the corporation gives it
a name, stipulates its composition, and prescribes its powers and duties. The powers of these
corporations are limited to those which are expressly conferred by the acts. The powers of
statutory corporation can be extended or limited by statutes. These can be also dissolved by
statutes. The statutory corporations are legal persons. They can sue and be sued. They can buy
and sell property.
(b) By registration under companies act

The registered companies are created by registration under the companies act. These are also
know as limited company comes into existence by complying with the provision of the
companies act (cap 486) a limited company may either be private or public limited company. A
private limited company can be registered by two or more persons but it is not allowed to call
upon the public for funds in the form of shares or debentures. A public limited company can be
registered by seven or more persons and it cano ffer its shares to the general public freely.
In Kenya, the limited companies are formed according to the companies act (Chapter 486). This
act is based on companies act 1948 of UK.
UNINCORPORATED ASSOCIATIONS
An incorporated association is one which has no corporate status is one which has no corporate
status i.e. it has no legal personality and cannot , therefore, own property or enter or enter into
contracts or sue or be sued in its own name. Such associations include clubs, societies, trade
unions, partnerships e.t.c. These associations consist of groups of individuals. The property
owned by such associations is regarded as the joint property of all members although this
property is held on the behalf of all members by trustees. Any contract entered into by a member

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TOPIC 2
LAW OF TORT
Meaning of Tort
Tort is a civil wrong which according to Sir F. Pollock defined as; an act which causes harm to a
determinate person whether intentionally or not, not being a breach of a duty arising out of a
person relationship or contract and which is either contrary to the law, or an omission of a
specific legal duty, or violation of an absolute right.
1. Prof. P H Winfield, Tortious Liability arises from breach of a duty primarily fixed by
law; this duty is towards persons generally and its breach is redressable by an action for
unliquidated damages.
2. Sir John Salmond defined Tort as a civil wrong for which the remedy is common law
action for unliquidated damages and which is not exclusively the breach of contract or the
breach of trust or other merely equitable obligation.
From the definition we can conclude the following characteristics about tort
1. Tort is a private wrong, which infringes the legal right of an individual or specific group
of individuals.
2. The person, who commits tort is called "tort-feasor" or "Wrong doer"
3. Tort litigation is compoundable i.e. the plaintiff can withdraw the suit filed by him.
4. Tort is a specie of civil wrong.
5. Tort is other than a breach of contract
6. The remedy in tort is unliquidated damages or other equitable relief to the injured.
Note; Liquidated damages should be distinguished from unliquidated damages.
Liquidated damages- this is a specified amount of compensation. The law is usually clear on
what the liable party pays or the parties themselves have already agreed to the compensation
Unliquidated damages- this kind of compensation is unspecified and the court will rely on the
nature of the case to determine it.

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NATURE OF TORT
This liability arises once there is a breach of duty which is primarily fixed by the law. Generally
the plaintiff has to prove that he suffered harm and there was violation of his legal rights. Some
actions, however, are actionable per se, i.e, without proof of injury, e.g. trespass to land.
The liability and remedy of a party in torts will depend on the following general principles
1. Damnum sine injuria (harm without legal injury)
This basically means the causing of damage without the violation of a legal right. Such a case
is not a valid claim in the court of law. The fact that the man is injured by another man's act does
not by itself constitute a cause of action; this may be even if the injury-causing act is intentional
or deliberate. A violation of the legal right is required in order for a valid cause of legal action to
exist.
In mogul steamship company v.mc Gregory gow and company , where a number of steamship
companies conspired and drove another tea-carrier company out of business by offering lesser
rates. Even though the plaintiff was financially injured, the House of Lords ruled that the other
companies were entitled to indulge in such competitive practices and therefore there was no
cause of action.
2. injuria sine dumno
This refers to a situation where one suffers a violation of his legal rights without actual injury or
damage, e.g. trespass to land
In such instance the person is entitled to remedy.
In, Ashbay Vs. White, the defendant, a returning officer at a voting booth, wrongfully refused to
register a duly tendered vote of the plaintiff, who was a qualified voter. The candidate for whom
the vote was sought to be tendered was elected. So no loss was suffered by the plaintiff for
rejection of his vote.
The Court held that violation of the plaintiff‟s right was an injury to him for which he must have
a remedy without proof of actual damage.
Tortious liability can also be determined on the basis of the fault principles. In this case it is
necessary to establish some fault on the part of the wrongdoer before he can be made liable.
Fault principle is determined in three ways;

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TOPIC 3
LAW OF CONTRACT
DEFINITION AND NATURE OF CONTARCT
A contract is an agreement of promises which is legally binding or enforceable by law.
According to Salmond a contract is an “agreement creating and defining obligations between the
parties.”
According to Sir William Anson, “A contract is an agreement enforceable at law made between
two or more persons, by which rights are acquired by one or more to acts or forbearances on the
part of the other or others.
Sir William Anson further observes as follows: “As the law relating to property had its origin in
the attempt to ensure that what a man has lawfully acquired he shall retain, so the law of contract
is intended to ensure that what a man has been led to expect shall come to pass; and that what has
been promised to him shall be performed.”
Based on the above definition a contract exist when there is

1. an agreement
2. the agreement is enforceable by the law
The law of contract imposes an obligation to the parties involved to see that they have performed
their promise, failure to do so attracts legal implications. This usually involves compensating the
aggrieved party once the party responsible has been found liable for the act or omission.
Essential of Valid Contract

The essential elements of valid contract as follows:
1. Offer and acceptance- There must be a ‘lawful offer’ and a ‘lawful acceptance’ of the
offer, thus resulting in an agreement. The adjective ‘lawful’ implies that the offer and =
acceptance must satisfy the requirements of the Contract Act in relation thereto.
2. Intention to create legal relation-There must be an intention among the parties that the
agreement should be attached by legal consequences and create legal obligations.
Agreements of social or domestic nature do not contemplate legal relations, and as they

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do not give rise to a contract e.g. an agreement to dine at a friend’s house or a promise to
buy a gift for wife are not contracts because these do not create legal relationship.
In commercial agreements an intention to create legal relations is presumed. Thus, an
agreement to buy and sell goods intends to create legal relationship is a contract provided
other requisites of valid contract are present.
3. Lawful Consideration-Consideration has been defined as the price paid by one party for
the promise of the other. An agreement is legally enforceable only when each of the
parties to it gives something and gets something. The something given or obtained is the
price for the promise and called consideration.
4. Capacity of parties-The parties to an agreement must be competent to contract,

otherwise it cannot be enforced by a court of law. In order to competent to contract, the
parties must be of the age of majority and of sound mind and must not be disqualified
from contracting by any law to which they are subject.
5. Free Consent- Free consent of all parties to an agreement is another essential element of
a valid contract. ‘Consent’ means that the parties must have agreed upon the same thing
in the same sense. There is absence of ‘free consent’; if the agreement is induced by
(i) coercion,
(ii) undue influence,
(iii) fraud,
(iv) Mis-representation, or
(v) Mistake.
6. Lawful object- For the formation of a valid contract, it is also necessary that the parties
to an agreement must agree for a lawful object. The object for which the agreement has
been entered into must not be fraudulent or illegal or immoral or opposed to public policy
or must not imply injury to the person or property of another.
7. Possibility of Performance - Another essential feature of a valid contract is that it must

be capable of performance. If the act is impossible in itself, physically or legally, the
agreement cannot be enforced at law.
All the above elements must be present. If one or more elements are absent then the contract may
be void, voidable or unenforceable.

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TOPIC 4
SALE OF GOODS LAW
INTRODUCTION
Businesses and consumers are usually free to contract on whatever terms they see fit. However,
contracts involving sales of goods can be subject to a range of statutory provisions. It is
important to distinguish between sale of goods and other forms of conveying, such as barter
trade, bailment, hire purchase, pledges, supply of services and gifts. The distinction is important
as it sheds light on the resolution of disputes if they go to court.
Definition
A contract of sale of Goods can be defined as contract in which the seller transfers or agrees to
transfer the property in goods to the buyer for a money consideration called a price.
Property means the general property in goods, and not merely a special property.
These contracts can be separated into two:
A. Sale contract – goods passes to the buyer once the contract is concluded
B. Agreement to sell- goods or property passes on the fulfillment of a particular or upon the
expiration of a specified condition
Sale of good should be distinguished from the following transaction
1. Contract of Barter or Exchange.

2. Contract of Gifts
3. Contract of Bailment
4. Contract of Hire Purchase
5. Contract of Loan on Security of goods
6. Contract of Agency
7. Contract of Licenses of intellectual property such „sales‟ of computer software and
patents.
8. Contract of Supply of services
The difference will in most cases be in money consideration called price and the condition in
which property comes to pass

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The following should be clearly understood when it come to understanding the nature of sale of
goods contracts
1. Seller- This is the person who sells or agrees to sell goods.

2. Property –This is the general property in goods or ownership. It signifies the bundle of
rights that a person has in relation to a subject matter .Eg. Right to use, misuse and to
dispose
3. Goods- this is includes

1. All chattels personal other than things in action and money
2. And all implements
3. Industrial growing crops
4. Things attached to or forming part of the land which are agreed to be severed before
sale or under the contract of sale
Types of Goods
1. Ascertained/Specific goods and Unascertained
2. Existing and Future Goods
Specific or Ascertained Goods

These are goods that have specifically been indentified and agreed upon by the parties
at the time when the contract of sale is made. Other goods which haven‟t been
identified are unascertained goods
Existing Goods
These are goods owned or possessed by the seller at the time when the contract of sale
is made.
Future Goods
These are goods to be manufactured or acquired by the seller after the contract of sale
is made.
4. Buyer- This is the person who buys or agrees to buy goods

5. Price- This is the consideration that passes from the buyer to the seller to support the
contract of sale of goods. The consideration must be monetary.

163

TOPIC 5
GENERAL PRINCIPLES OF CONSUMER CREDIT
NATURE OF HIRE PURCHASE CONTRACT
Definition of hire purchase
This is a contract by which goods are delivered to a person who agrees to make periodical
payments by way of hire, with an option of buying the goods after the started hire installments
have been paid.
The goods may be returned to the owner at any instance before the option is exercised, on
payment of sum stated in the contract. Until the option is exercised there is no guarantee to buy
the goods.
These contracts thus contain three parts;
1. Contract of bailment- under which the hirer obtains possession of the goods yet the goods
remain in the ownership of the owner
2. Option which entitle the hirer to purchase the goods or hire them
3. Contract of sale which makes the hirer the owner of goods already in his/her possession
Hire purchase and other instalment sales
The hire-purchase transaction is intended to protect the owners title to the goods should the hirer
(the buyer) decide to sell them to a third party who buys in good faith before full installments is
paid.
It is worth noting that this is differs from sale of goods act in which if the buyer is in possession
of the goods, with the consent of the seller, sells them to a third party who buys in good faith
them property passes to the third party.
Hire purchase therefore gives two options, i.e.

i. purchase the goods or
ii. return them.

179
Helby v. Matthews (1895)
The owner of a piano agreed to let it on hire, the hirer to pay rent on monthly
installments, on the terms that the hirer might terminate the hiring by returning the
piano to the owner but remain liable for all arrears of hire. Also that the piano should
remain property of the owner but if the hirer had paid punctual monthly installments,
the piano should become his property. The hirer after having paid a few installments
pledged the piano to a pawn broker.
Held; the hirer was under no legal obligation to buy but had an option to either return
the piano or become its owner by payment in full. Therefore, he had not “bought it” and
the owner could therefore recover it from the pawn broker.
Hire purchase differs from credit sale agreement and conditional sale in the following
ways;
It is important to distinguish hire purchase from credit sale agreement and conditional sale.
While all three involve payment via installments, they however differ from higher purchase in
the following sense;
Credit sale agreement - This makes it the customer’s legal obligation to buy in that;
1. It is a contract of sale
2. The property in goods passes to the buyer as soon as the 1st installment is made
Conditional sale- This contract makes it the buyer’s obligation to buy but property in goods
passes to the buyer only if the conditions that form the subject matter of the sales have been
fulfilled.
PROVISIONS RELATING TO HIGHER PURCHASE
1. Before the Hire Purchase Agreement is entered into the owner is bound to notify the
prospective Hirer the cash price of the goods.
However, the owner is not bound to do so if:

a. The Hirer has selected the goods or similar goods by reference to a catalogue
stating the Cash Price
b. The Hirer selected the goods or similar goods from a selection which stated the cash
price.
2. The Hire Purchase agreement must be written.

180

TOPIC 6
INDEMNITY AND GUARANTEE
NATURE OF THE CONTRACTS
INDEMNITY CONTRACT
In the contract of Indemnity, a person agrees to rescue another person who is a party of some
other contract and come across any loss out of the same. The loss can be incurred from the act of
any party or by any means in that contract.
Indemnity contract includes two parties namely; Indemnifier and Indemnity holder. The person
who is promising to pay compensation is called Indemnifier and the person who`s loss is
compensated is called Indemnity holder.
 Example: There is a contract between X and Y according to which X has to Sell a tape
recorder (which is selected) to Y after three months. On the next day of their contract Z
has come to X and has insisted on selling the same tape recorder to him (Z). Here Z is
promising to compensate X for any loss faced by X, due to selling the tape recorder to Z.
X has agreed. Now the contract which has got formed between X and Z is called
indemnity contract, where Z is indemnifier and X is indemnity holder.
 Example: A and B are in the contract of Indemnity. B is in a contract with C regarding a

sum of Ksh 10000/-. According to the contract of indemnity between A and B, A agrees
to rescue B from any consequence that occurs from the contract of B’s of Ksh 10000/-
with C.
Types of Indemnity
The indemnities are of two types;
1. The Express Contract of Indemnity

2. The Implied Contract of Indemnity

186
Express Contract of Indemnity: When the contract of indemnity is written or orally consented,
then such indemnity contracts are said to be Express Contract of Indemnity.
Example: A and B are into the contract of Indemnity. A agrees to reimburse the loss incurred by
B from a contract with C of some so-called amount.
Implied Contract of Indemnity: When the contract of indemnity is applied by a statute or by a

common law that is in existence, then such indemnity contracts are said to be Implied Contract
of Indemnity.
Example: A and B are agent and principal. A has to supply goods to B for his business. A
supplied goods but B did not want them and denied taking the same. A can sell the goods and if
he incurs any loss while selling them, then B has to make good the loss of A and the statue or the
common law will ensure the same.
GUARANTEE CONTRACT
When one person signifies to perform the contract or discharge the liability incurred to the third
party, on behalf of the second party, in case he fails, then there is a contract of guarantee. In this
type of contract, there are three parties, i.e. The person to whom the guarantee is given is
Creditor, Principal Debtor is the person on whose default the guarantee is given and the person
who gives guarantee is Surety(Guarantor).
Three contracts will be there, first between the principal debtor and creditor, second between
principal debtor and surety, third between surety and the creditor. The contract can be oral or
written. There is an implied promise in the contract, that the principal debtor will indemnify the
surety for the sums paid by him as an obligation of the contract provided they are rightfully paid.
The surety is not entitled to recover the amount paid by him wrongfully.
 Example: Y is in need of ksh.. 10000/-. Upon guarantee by Z, Y has got the amount from
X. Here X, Y and Z are creditor, principal debtor and surety respectively.
 Example: Here we have another example of the contract of guarantee, Mr. kamau takes a
loan from the bank for which Mr. Njoroge has given guarantee that if Kamau default in
the payment of the said amount he will discharge the liability. Here Njoroge plays the
role of surety, Kamau is principal debtor and Bank is the creditor.

187

TOPIC 7
PARTNERSHIPS
Partnership is the relation which subsists between persons carrying on a business in common
with a view of profit.
Characteristics of partnership
1. Membership-The logical minimum number in partnership is 2 with a maximum of 20.
2. It is not an incorporated association
3. Each partner is an agent of the other in the firm
4. It can sue or it can be sued its registered name
5. It exists with an aim of making profit
6. A partner’s liability to debts and obligations of the firm is generally unlimited
7. Death, insanity or bankrupt of partners may lead to dissolution
In a partnership, partners may be classified as:-

1. Real and Quasi
2. Minor and Major
3. Active and dormant / sleeping
4. Limited and General
Advantages of partnership
Some of the advantages of partnership as a form of business include;

1. There are easy to form since they don’t require many legal formalities
2. Business resources are easy to acquire through contribution from the partners
3. In case of professional firms there is specialization of labour
4. Losses are shared among the partners
5. Management duties are shared among the partners
Disadvantages
1. Liabilities of partners for debts and obligations of the firm is unlimited i.e. partners are
liable to use personal assets if the firm is insolvent.
2. Sharing of profits reduces the amount available to individual partners.
3. A single partner’s mistake affects all partners.
4. Disagreements between partners often delay decision-making.
5. Tends to rely on a single partners effort to manage.
6. Death, bankruptcy, or insanity of a partner may lead to dissolution.

195
FORMATION OF LIFE
The formation of a partnership is not subject to any legal formalities, the agreement between the
parties may take any of the following forms;
1. Oral or by word of mouth.

2. Written with or without seal
3. Implied from conduct of the parties.
However, the partners may on their own accord reduce the basis of their relationship into a
formal document detailing the terms and the condition of the association. The document is the
Partnership Deed or Agreement or Articles of Partnership. It is not however, a legal requirement
for them to do so.
Contents of a partnership deed

If the partners decide to register the partnership they will be required to have a partnership deed.
Such document will contain the following;
1. Nature of business
2. Contribution of the partners. (capital)
3. Profit sharing ratio
4. Rules for determining interest on capital
5. Method of calculating goodwill
6. Power of partners
7. Accounts and audit
8. Expulsion of Partners
9. Procedure for settlement of disputes
Consequences of Non Registration of a Partnership Form of Business Organization
If the firm is not registered then it will suffer the following limitations
1. It cannot enforce its claims against a third party in a court of law

2. It cannot file legal suits against any of its partners
3. Partners of an unregistered firm cannot file any suit to enforce a right against the firm
4. A partner of an unregistered firm cannot file a suit against other partners.

196

TOPIC 8
INSURANCE
NATURE OF THE CONTRACT
Insurance is an important part of modern life. Individuals and businesses take out insurance to
protect themselves from loss that may occur due to damage to property or loss of life.
What is insurance?
This is a contract whereby a party known as the insurer undertakes, in consideration for a sum of
money known as premium paid by the insured, to pay a sum of money or its equivalent on the
happening of a specified future event.
The insurance contract is a contract like any other, but with particular peculiar principles. The
insurable interest should be beyond the control of either party and there must be an element of
negligence or that there is uncertainty. Contracts dealing with uncertain future events are either
alieatory, contingent or speculative. In insurance risk exists in priori, whether or not we insure.
However in a wager/stake/ gamble there is no insurable interest.
Parties to the contract
Insurer: This is the person who undertakes to pay the sum assured or indemnity when the
insured event occurs. To carry on insurance business in Kenya, a person must be a body
corporate (company) licensed by the Commissioner of insurance to do business.
Insured: This is the person who takes out insurance cover, he is the person who pays the
premium and may be a natural or artificial person. The insured must have an insurable interest in
the subject matter of insurance.
Essentials of an insurance contract
1. Agreement
For a contract of insurance to exist, there must be an agreement under which the insurer is legally
bound to compensate the other party or pay the sum assured [premium]. This is the consideration

204
that passes between the parties to support the transaction. It is asserted that premium is the
considerations which the insurers receive from the insured in exchange for their undertaking to
pay the sum assured in the occurrence of the event insured against. Any consideration sufficient
to support a simple contract may constitute a premium in a contract of insurance.
2. Uncertainty
The insurance contract is aleatory, contingent or speculative as it deals with uncertain future
events. For an event to be Insurable it must be characterized by some uncertainty.
3. Insurable Interest
The insurable event must be of an adverse nature .i.e. the insured must have an Insurable interest
in the property, life or liability which is the subject of the insurance. Insurable interest is said to
be the pecuniary or financial interest which is at stake or in danger if the subject matter is not
insured. It is a basic requirement for the contract of insurance.
4. Control
The insurable event must be beyond the control of the party assuring the risk as it was held in
Re Sentinel Securities P.L.L
5. Accidental or Negligent Loss
Insurance can only be effected where loss is accidental in nature or is a consequence of a

negligent act or omission. Loss occasioned by intentional acts does not qualify for indemnity or
for payment of the sum assured. It was so held in Toxleth v Hampton.
6. Risk
Risk has been defined as the chance of loss, the probability of loss or the probability of any
outcome different from the one expected. It is a condition in which there is a possibility of an
adverse deviation from a desired outcome that is expected or hoped for. For individual proposes,
risk is measured by the probability of loss as the individual hopes that it would not occur.

205

TOPIC 9
AGENY
Meaning
“An agent is a person employed to do any act for another or to represent another in dealings with
third persons. The person for whom such is done, or who is represented, is called the principal”.
The contract which creates the relationship of ‘principal’ and ‘agency’ is called an ‘agency’ thus
where A appoints B to buy ten bugs of sugar on his behalf, A is the ‘principal and B is the
‘agency’ and the contract between the two is the ‘agency if, pursuance of the contract of agency,
the ‘agent’ purchase the bags of sugar from C, a wholesale dealer are brought into direct
contractual relations.
Under a contract of agency the agent is authorized to establish privity of contract between the
principal ( his employer ) and a third party. As such as the function of a third parties. In a way,
Therefore an agent is merely a connecting link. After entering into a contract on behalf of the
principal with third party, the agent drops out and ceases to be a party to the contract and the
contract bind the principal and the third party as if they have made it themselves
Characteristics of agency
1. The agent performs a service for the principal

2. The agent represents the principal
3. Acts of the agent affects the legal position of the principal the agency relationship differs
from trusts and bailment.
Distinguishing agency from trust and bailment
TRUST
This is an equitable relationship whereby a party known as trustee expressly, impliedly or
constructively holds property on behalf of another as beneficiary.
It is similar to agency in that:
1. Some of the duties of the trustee are similar to those of the agent e.g must act in good
faith and avoid conflict of interest.
2. Some of the remedies available to the beneficiary against the trustee are available to the
principal against the agent e.g account

212
However, they differ in that:
1. Whereas most agencies are contractual, trusts are not
2. Whereas the principal’s action against the agent for fraud is limited by the Statute of
Limitation, an action by the beneficiary against the trustee has no time limitation.
BAILMENT
This is a contract whereby a party known as bailor delivers goods to another known as bailee
with specific instructions that the goods be dealt with in a particular manner or be returned as
soon as the purpose for which they were bailed is accomplished.
Bailment includes:
1. Deposit or storage for safe storage
2. Contract of hiring
3. Pledge
4. Contract for work or repair
5. Carriage of goods
It differs from agency in that:

1. The bailee does not represent the bailor
2. Acts of the bailee do not affect the legal position of the bailor
CREATION OF AGENCY
Once an agency relationship is created, an agent comes into existence .An agency relationship
may come into existence in the following ways;
1. By agreement, contract or appointment

2. By ratification
3. By estoppel
4. By necessity
5. By presumption or from cohabitation
1. AGENCY BY AGREEMENT
This agency arises when parties mutually agree to create it. Their minds must be at ad idem and
both parties must have the requisite capacity .The purpose of the relationship must be legal.

213

TOPIC 10
NEGOTIABLE INSTRUMENTS
NATURE AND CHARACTERISTICS
What is a negotiable instrument?

This is a document which represents money and the title in passes to a bona fide transferee free
from only defect. It is a chose in action. Negotiable instruments are transferable by reason of law
or trade usage or custom.
Characteristics of Negotiable Instruments

1. Consideration is presumed to have been provided i.e. past consideration is good
consideration.
2. A bona fide transferee of a negotiable instrument need not be notified before it is
negotiated.
3. A holder for value can sue on it in his own name.
4. If payable to the bearer, it is negotiable by delivery.
5. If payable to the order of specified person, it is negotiable by endorsement/ endorsement
and delivery.
6. The party liable on a negotiable instrument needs to be notified before it is negotiated.
Examples Include: Cheques, bills of exchange, promissory notes, share warrants, dividend
warrants, bearer debentures etc.
TYPES: CHEQUES, PROMISORY NOTES, BILLS OF EXCHANGE
CHEQUES
Under Section 74(1) of the Bill of Exchange Act, a cheque is a bill of exchange drawn on a
banker, payable on demand. It is a negotiable instrument negotiable by delivery or by
endorsement and delivery. It differs from a bill of exchange in various ways: -
1. It can only be drawn on a banker

2. It is payable on demand
3. It does not require acceptance
4. Non-presentation does not discharge it
5. It is less negotiable

225
6. It may be crossed generally or specially
7. Notice of dishonour is not necessary
Types / classification of cheques
Cheques may be classified on the mode of payment and to whom payable:
1. Bearer cheque: This is a cheque whose proceeds are payable to the holder.
2. Order Cheque: This is a cheque whose proceeds are payable to specified person or his
order. Whereas a bearer cheque is negotiable by delivery an order cheque is negotiable by
endorsement or delivery.
3. Open Cheque: This is a cheque whose proceeds are payable across the counter.
4. Crossed Cheque: Is a cheque that contains two parallel transverse lines on its face with or
without account. A crossing is an instruction to the banker not to pay the proceeds across
the counter.
Types of crossing
A cheque may be crossed generally or specially:
1. General Crossing: Consist of two parallel transverse lines on the fact of the cheque with
or without the words “and Co.” “Account payee” “Not negotiable” etc. A cheque crossed
generally may be crossed specially by the drawee,
2. Special Crossing: Consists of two parallel transverse lines of the face of the chequewith
the name of the banker in told.
Banker-customer relationship
There is a simple contractual relationship between the banker and customers. It is a debtor credit
or relationship which imposes upon the parties certain legally binding obligations.
DUTIES OF THE CUSTOMER
1. Duty of Care: The customer is bound to the exercise reasonable care when
drawingcheques to guard against alterations. The banker is not liable for any loss arising
if the customer has failed to exercise reasonable care.

226

TOPIC 11
THE LAW OF PROPERTY
This is the law concerned with the bundle of rights a person may have on land. Such rights may
be exclusive or otherwise.
Property law defines the range of functions a person may exercise in a given situation at a given
time. It confers proprietary rights and imposes obligations on owners/holders of land.
Land includes physical strata, water all things growing on it, buildings or other things
permanently annexed on the land.
Common law conception of land is based on the maxim cujus est solum which literally means
that land encompasses more than just the soil. It includes all things found in the aerospace above
and the geospace below. Land includes all the permanent fixtures. The common law conception
of fixture is expressed by the maxim Quic Quid plantatur solo solo codit which literally means
whatever is attached to land belongs to the land.
At common law, fixtures were deemed to be part of the land and could not be removed.
However, this principle was modified and certain categories of fixtures could be removed e.g.
 Trade fixtures to enable a tenant carry out his trade

 Ornamental and domestic features if they did not cause substantial damage to land
 Agricultural fixtures could be removed from 1948
The common law principles of applies in Kenya’s property law, however it has been modified by
statute law e.g. The Water Act,1 The Mining Act, The Way leaves Act2 and The Agriculture
Act.
POSSESSION AND OWNERSHIP

Whereas ownership signifies title or a bundle of rights exercisable with respect to the subject
matter, possession is the mere right to hold and may be actual or constructive.
Ownership confers proprietary rights.

However, in certain circumstances, possession may confer the right to use.
Ownership of land may take three forms:
1. Sole ownership
2. Joint ownership
3. Common ownership

238
SOLE OWNERSHIP
The land in question is owned by one person who exercises all the rights in relation to it
JOINT OWNERSHIP
A situation where property is owned by two or more persons. It enjoys all the characteristics of a
single owner. Proprietors have no individual shares in the property. Joint ownership is
characterised by four unities namely:
 Unity of title
All the persons derive title from the same title
 Unity of possession
All the persons are entitled to each and every part of the land. They have the same rights to use
any part of the land.
 Unity of interest
All the owners own a similar interest in nature, extend and duration
 Unity of time
The interest of the owners commences at the same time
COMMON OWNERSHIP
This is the ownership of separate but undivided shares in the land. It does not confer the right of
survivorship and a common owner can transfer his share to others with consent of the other
owners. Common ownership terminates when the land is sold or partitioned
INTEREST IN LAND
It may take any of the three forms:
1. Estate
2. Servitude
3. Encumberances
ESTATE IN LAND
An estate in land may be freehold or leasehold.
FREEHOLD ESTATE
Confers a bundle of rights exercisable for an indefinite duration. It may be acquired by
inheritance or otherwise. The rights it confers can be transmitted to future generations.
Freehold estates include;

 Free simple
 Free tail
 Absolute proprietorship

239

TOPIC 12
RESOLVING COMMERCIAL DISPUTES
Definition
A commercial dispute is any disagreement between two businesses, usually regarding a contract
(a legally binding agreement). Although the agreement is normally oral or in writing, contracts
can also exist when nothing has been said or written by the parties to it: these are implied
contracts. Other types of commercial dispute not covered by contracts include libel against a
business (excludes employment law issues and Employment Tribunals).
There are three main types of dispute resolution currently in use:
1. Arbitration
2. Mediation
3. Negotiation
Advantages of resolving commercial disputes
a) Resolving a commercial dispute provides an opportunity to:

b) Remedy an unwanted commercial situation
c) Present your side of the argument
d) Remedy an injustice
e) Learn lessons about the way your business is run
f) Appear strong, principled and magnanimous.
Disadvantages of resolving commercial disputes
There are few drawbacks to actually resolving disputes, but during the process some or all of the
following problems might arise:
a) Financial expense
b) Increased stress and pressure
c) Senior executives' time being taken up by the dispute
d) Bad publicity

259
Options for resolving your dispute
ARBITRATION
This is an out of court method of settlement of civil disputes by arbitral tribunals which make
arbitral awards as opposed to judgments.
The law relating to arbitration in Kenya is contained in the Arbitration Act2,. Under the Act, an
arbitration agreement is an agreement between parties to refer to arbitration all or certain
disputes arising between them.
Principles of Natural Justice in Relation to Arbitration proceedings are a fundamental

requirement of justice in deciding a dispute between two or more parties.
Firstly, that the arbitrator or the tribunal must be and must be seen to be disinterested and
unbiased. Secondly, every party must be given a fair opportunity to present his case and to
answer the case of his opponent.
The first principle is embodied in Section 13 of the Arbitration Act which provides that when a
person is approached for appointment as an arbitrator he must disclose any circumstances likely
to give rise to justifiable doubts as to his impartiality or independence. That duty on the part of
the arbitrator is a continuing duty right from the time that he is approached through to the time he
accepts appointment, conducts the reference, and renders his award.
So under Section 13(2) the arbitrator is obliged through the arbitral proceedings to disclose
without delay such circumstances.
The arbitrator must be on his guard with respect to connections with a party or connections in the
subject matter of dispute or connections with the nature of the dispute. And the test that the
arbitrator must always bear in mind is whether a reasonable person not being a party to the
dispute would think that the connection was close enough to cause the arbitrator to be biased.
An arbitration agreement must be written, it may take the form of a detailed agreement or a
clause in the agreement.
The Arbitration Act governs national and international disputes.
Methods of reference to arbitration
A dispute may be referred to arbitration by:

1. The parties to the agreement
2. An Act of Parliament
3. A court of law with consent of the parties to the dispute.

260

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ATD LEVEL 1

INTRODUCTION TO COMMERCIAL LAW

The court system

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2.4. Sale of goods

5. General principles of consumer credit

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6. Indemnity and Guarantees

10. Negotiable instruments

11. The law of property

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13. Emerging issues and trends

Topic 1: Introduction to Law

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NATURE PURPOSE AND CLASSIFICATION OF LAW

 What do you understand by the term law?

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Generally speaking law has the following characteristics

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Sources identified by the Judicature Act

Sources identified by the Constitution and the Kadhis Court Act

Sources of law of Kenya may be classified as:

1) Written and unwritten sources

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1. Written and Unwritten

Supremacy of the constitution

The supremacy of the Constitution as source of law is manifested in various ways:

1. All other laws derive their validity from the Constitution

4. Amendment procedures: The Constitution has a special amendment procedure. Under

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Administrative functions can be divided into a number of broad categories namely

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3. Legislative functions: These include the function of making or creating subsidiary

4. Judicial functions: These primarily involve the functions of determining claims or

Functions/purposes of administrative law

DOCTRINE OF SEPARATION OF POWERS

Doctrine of separation of powers is a legal framework developed by a French jurist named

This doctrine is a characteristic of Constitutionalism which is the theory of limited government.

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i. The structure – The hierarchy or levels of Courts.

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ii. Corporation Aggregate

(a) By act of parliament

(b) By registration under companies act

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Note; Liquidated damages should be distinguished from unliquidated damages.